Given the potential impact of biodiversity loss on the global economy,[1] regulators and investors have started to increase pressure on companies to report on and address the potential financial risks and impacts on nature. This month’s launch by the Taskforce on Nature-related Financial Disclosures (TNFD) of its inaugural disclosure framework could further increase awareness of biodiversity- and nature-related risks. This voluntary framework provides detailed disclosure recommendations and practical guidance on how to assess and incorporate biodiversity risks and opportunities.[2]
How have companies reacted to this growing reporting pressure?
We assessed the reporting practices of 1,686 constituents of the MSCI ACWI Index (peer group)[3] where relevant FY2022 annual reports were accessible and could be analyzed using natural-language processing tools. Our analysis provides a mixed picture. We found that 82% of the peer group referred to biodiversity- or nature-related terms in their FY2022 reports, an increase from 75% for FY2019. However, only 8% referred to biodiversity-related regulations and frameworks, such as the European Sustainability Reporting Standards or the Global Biodiversity Framework. Roughly half of the peer group reported on nature-related risks in their annual reports, including dependencies on ecosystem services such as animal pollination, soil quality or water supply.[4]
Reference to biodiversity and nature in annual reports
These findings suggest a gap between corporate disclosure practices and growing expectations from regulators or initiatives such as the TNFD toward granular reporting of nature risks.
We also explored whether industries[5] with higher relevant risk exposure and potential impacts referred to biodiversity- or nature-related risks more frequently. For this purpose, industries that were assessed on biodiversity-related key issues under our ESG Ratings methodology were classified as high-risk.[6] Overall, our analysis did not reveal a striking difference between high-risk and other industries. A total of 89% of the peer group in high-risk industries used biodiversity-related terms in their FY2022 annual reports, which was only slightly higher than other industries (82%). The gap was larger, however, for explicit references to biodiversity- and nature-related risks and dependencies: 54% of the high-risk peer group mentioned relevant terms compared to 37% for other industries.
In addition, we found that references to biodiversity- and nature-related risks significantly differed among high-risk industries. While more than 80% of the peer group in the diversified chemicals, construction materials, oil and gas refining, paper and forest products and beverages industries referred to such risks in their FY2022 annual reports, we found only limited references from companies in biotechnology, semiconductor and semiconductor equipment, oil and gas exploration and commodity chemicals. At the same time, some industries, such as automobiles, construction and engineering and industrial conglomerates that were not assessed on biodiversity-related key issues had a relatively high level of companies that mentioned these risks in their reports.
References to biodiversity- and nature-related risks in annual reports differed between industries
Did companies that talk the talk, walk the walk?
How did these references correlate with better management of biodiversity-related issues? We looked at the management practices of peers assessed on the key issue of biodiversity and land use, such as those in metals and mining, agricultural products and utilities. We did not find a strong positive correlation between companies’ biodiversity and landuse management and average references to biodiversity- or nature-related risks in annual reports.
Reference to biodiversity- and nature-related risks vs biodiversity and land use management
Despite the current state, with growing regulatory and investor focus on biodiversity, we may see improved corporate disclosure levels in this area. The launch of TNFD may also move the market toward more standardized disclosures and metrics that could help investors better assess risks from nature loss.